Defining the strategy of Reversal’
Strategy against the trend trying to make small gains on trading against the trend. Traders also refer to the practice as “counter trade”. Opposite traders use the reversal trading strategy. They try to buy shares when the price of securities is low and sell when it is high. Traders who use this strategy realize smaller benefits and is ready to refuse from the bulk of a trending move. Strategy counter-trend ignores people’s investment philosophy of “trend is your friend”.
Penetration strategies countertrend’
Strategy counter-trend to use momentum indicators, reversal patterns and trading ranges, to determine the best areas for the execution of the transaction. Traders that use this strategy, you should always remember that security may resume its trend at any time and use risk management techniques like stop loss to limit losses.
Traders can use momentum indicators like the relative strength index (RSI), in combination with price support and resistance to find the high probability of a reversal. For example, a trader against the trend can buy security, if it finds support at 52-week low but RSI makes a oversold below 30. On the other hand, the trader could open a short position if the price reaches a resistance area and the RSI rises above 70.
To add more confirmation, traders can wait for a bullish or bearish candlestick pattern before entering the trade. Range countertrend should be wide enough, i.e., target profit at least twice as wide as the stop loss. For example, if the trader is using a $5 stop loss, take profit should be at least 10$. (See: combining trend indicators and Reversal.)
The benefits of using strategies countertrend
More trading opportunities: when the price of a security fluctuates in a trading range, it presents many opportunities to buy on support and sell on resistance. The investor may have to sit on your hands for a long period if they only trade pullbacks in a trending market.
Less drawdown: strategies against the trend typically have less drawdown compared to trend following strategies because traders take smaller profits more regularly. Although trend strategy can give a significant boost overall, a trader can not get stopped many times before to capture a big move.
Limit the use of strategies countertrend
Commissions: more trading opportunities as a result of more commissions. Traders who use the strategies countertrend expected to do a significant number of monthly transactions should be used per one share structure of the Commission. This means that the broker charges a flat fee per item as opposed to transaction fees. Then the traders only pay a Commission for the number of shares which they sell, allowing them to scale out of positions cheaper.
Duration: counter-trend moves not as long as the trend is moving; therefore, traders often need to track the markets to find the best entry point and exit for the transaction. Traders can automate their strategies reversal to overcome this limitation. (See. also: Automated trading systems: pros and cons.)